Following an introduction and overview, we continue with the Markowitz mean-variance optimization technique and its application in portfolio construction and asset allocation.We show how to identify the minimum-variance set and explore several important properties of the portfolio frontier, including the two-fund separation theorem and the linear beta/return relation. Next, we review the Capital Asset Pricing Model. We derive the main results of these models and examine their empirical relevance and implications for portfolio management. We then discuss the concept of market efficiency and relate it to various documented stock return "anomalies".

Next, we discuss in detail the Arbitrage Pricing Model. We look at empirical cross-sectional asset pricing studies, e.g., several papers by Fama and French. Finally, the course deals with performance measurement. We will cover relative performance, tracking error and information ratio, as well as risk adjusted performance measures such as the Sharpe Ratio, the Jensen Alpha and the Treynor Index. Furthermore the method of style analysis will be introduced.

• Knowledge about return and risk from historical records
• An understanding of the interplay between risk aversion and optimal capital allocation
• Know how to construct optimal risky portfolios
• An understanding of the major equilibrium asset pricing models such as the CAPM and the APT
• The ability to evaluate a portfolio’s performance

Furthermore, the classes contribute to the students’ ability to:

• Work effectively in groups, by working on complex portfolio problems
• Deliver professional presentations
  
• Adequately communicate and participate in in-class discussions
• Find, read and understand relevant academic literature
• Find and use relevant data to solve portfolio optimization problems

A maximum of three sessions (including the exam sessions) may be missed.

The course consists of a mix of mandatory regular lectures, class room discussions of readings, calculation, and data analysis assignments. The lectures will be largely based on the instructors’ lecture notes and additional readings. There will be a hands-on assignment to practice the concepts developed during the lectures. The assignment will involve quantitative analyses using MS Excel. Students will have to work in groups of three students. Solutions to the assignment have to be uploaded to Canvas by January 20. In-class presentations will take place on January 21.

The evaluation will be based on:

1. Mid-term exam (35%): There will be a 90-minute, closed-book mid-term exam.
2. Final exam (35%): There will be a 90-minute, closed-book final exam. All course materials are relevant for the final exam.
3. Assignment (20%): The assignment has to be solved in groups of 3 students and presented in class. We will ask each group member questions.
4. Class participation (10%). Students can earn participation points from (i) answering questions raised by the instructors, (ii) contributing to class-discussion; (iii) summarizing and critically discussing assigned readings. 

Students need at least 50% of the total points to pass this course. The remaining cut-off points are 65%, 77.5%, and 90%.

Since the evaluation is an immanent aspect of the class (PI), there is no right to any retake exam.

• Successful completion of the Orientierungskurs Finanzwirtschaft
• Successful completion of the Internes Rechnungswesen course

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• Basic knowledge in linear algebra (matrix operations, solving systems of linear equations)
• Basic knowledge in Excel.

otto.randl@wu.ac.at; florian.schausberger@wu.ac.at; alina.steshkova@wu.ac.at